China's Mutual Fund Industry Has Become More Mature

As international firms enter the market, more onshore managers are focused on developing their own strengths in investment talent, culture, and process.

Ruth Saldanha 25 September, 2020 | 17:00
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Global investors and asset managers are eyeing the multi-trillion-dollar Chinese fund market. Last month, BlackRock received approval to set up a fully controlled mutual fund company, and others are expected to follow suit.

“From the point of view of the individual investor, we believe more competition is a positive thing, as end investors will enjoy broader and better product choices as a result of the increasing competition," says Rachel Wang, Morningstar's director of manager research in China. "We also expect that these global asset managers, which tend to be more long-term-oriented and fundamental-driven than local fund houses, will bring along their time-tested investment philosophies and introduce international investment best practices to the local market."

She points out that while international firms are entering the market and building up their China A-share investment capabilities, more onshore managers are focused on developing their own strengths in investment talent, culture, and process.

"We think all of these are good signs that the industry has become more and more mature," Wang says.

Key Drivers of Growth

The stock markets are back on the rise after the coronavirus-driven market decline in early 2020, and Wang sees equity funds as being the key drivers of growth, as investor appetite for equity products has returned. She noted that bond funds also suffered from some redemptions, as many have posted negative returns since May amid the rising concerns on tightening liquidity and unchanged interest rates.

"This is also observed in the new fund market, whereas a handful of newly launched stock and mixed-asset funds in China have attracted huge flows during their initial fundraising periods over the past few months," Wang says. "On the flip side, money market funds were losing share, as they saw record-low yields and many products' yields dip below bank deposit rates over the past few months."

However, Wang does not expect this rapid growth of equity products to persist for much longer. She points out that as the market became more volatile in late August and September, there were not as many blockbuster fund launches as before.

More Room to Grow

Wang points out that although 2020 marks the 22nd anniversary for China mutual fund industry, and the industry has grown exponentially over the past two decades, it still has a lot of room to grow.

She expects mutual funds to play a more important role in China's personal savings and third-pillar pension market. In 2019, the China Securities Regulatory Commission announced that mutual funds will be integrated into the country's pension system, and China's first-ever target-date and target-risk retirement funds have recently been launched. Meanwhile, in October 2019, the regulator launched a pilot scheme to test the investment advisory business in mutual fund investments, a move to experiment with shifting away from the traditional commission-based model to an advisory fee-based model when selling fund products.

"The fund management industry is transforming to become more long-term-oriented and fundamentally driven, which may help fund products gain more traction in the long run," Wang says.

An Eye on Fees

As China's fund industry grows and matures, Morningstar awarded it an improved Fees and Expenses grade of Average in its Global Investor Experience report. Late last year, Morningstar published the first chapter of its sixth biennial GIE, which grades the experiences of mutual fund investors on a five-tier scale—Top, Above Average, Average, Below Average, and Bottom.

The report covers 26 markets and has four independent chapters on Fees and Expenses, Regulation and Taxation, Disclosures, and Sales. You can find the first chapter here. The report found that the global trend continues toward lower fund fees, with the majority of the 26 markets seeing their asset-weighted median expense ratios for locally domiciled and available-for-sale funds fall since the 2017 study.

China's Fees and Expenses grade improved from Below Average in 2017 partly because of a relatively low asset-weighted median expense ratio of 0.44% for fixed-income funds. The report noted that China has seen a proliferation of low-fee, short-duration fixed-income products that have attracted assets, leading to the lower median fee for fixed-income funds. China's grade continues to be held back by investors' inability to avoid paying loads and retrocessions when not receiving advice. More than 70% of share classes in China report a front sales load, which can vary among the different distribution channels.

According to the GIE report, "Investors who purchase funds online often benefit from larger discounts to the sales load listed in the prospectus compared with those who choose to buy from banks. Purchasing investment advice directly rather than through loads or trails is not a known practice for individual investors in China. Almost all funds are associated with retrocession fees and loads."

But this does not seem to matter to Chinese investors.

Wang points out that because of its very nature, the China onshore market remains to be a high alpha space, where active funds have enjoyed much higher success rates and survivorship over their passive peers. She adds that through 30 June 2020, 80% to 90% of China active stock-heavy funds survived and outperformed their average passive peers during the trailing one-, three-, five-, and 10-year periods.

"Therefore, China investors pay very little attention to fees while selecting funds, especially when it comes to active products," Wang says. "As the market becomes more efficient and the mutual fund business gets more competitive, fees will be a potential area for industry participants to compete, and the overall fee level of the market will come down subsequently."

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Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca

 
 

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